Very Broad Description Of The Issue

Woodford Investment Management Ltd are/were (as they are closing down) a highly respected fund management company that runs three funds and one trust under their own brand.

Around May/June 2019 they found that the demand for withdrawals from one of these funds, The Woodford Equity Income Fund, was outstripping fund's ability to sensibly service, so the fund suspended withdrawals.

Whilst this is relatively unusual it is a legitimate process and was instigated by the fund recognising that it had an issue. It was not an action imposed from the outside by a regulator.

The fund was about 5 years old at the time and had not performed as well as expected by many of its members over the last two years.

However it is not clear why a couple of bad years caused fund members to lose confidence and withdraw their funds.

There have been a number of suggestions that the fund had moved to far away from solid blue chip companies to unlisted start-ups, but this is only a suggestion.


Period
Equity Income Fund
% Growth
June 15 - June 16 2.5%
June 16 - June 17 14.26%
June 17 - June 18 -11.8%
June 18 - June 19 -19.4%


Investors in the fund were a combination of professional investors, councils or similar bodies and a significant portion of retail investors who had bought in via brokers such as Hargreaves Lansdown.

The level of understanding that the private investors had of the risks is currently unclear. There have been a number of comments in the press that suggest that many regarded it as "souped up" savings account rather than an investment that could lose money.

Lessons

Sadly the situation is so simple that there are no new significant lessons for an experienced investor to learn.

Informed and uninformed investors gave money to a third party to manage and that third party didn't do as well as hoped for.

The details may be fairly specific to this failure;
  • Open Ended Investment Funds are always vulnerable to investor panic.

  • Its more mainstream investments had issues but were they truly "bad investments" for example Stobart, Purple Bricks and Provident or did investors panic?

  • What were they doing in Industrial Heat and did this investment decision affect overall confidence excessively?

  • Did Woodford put too many illiquid start-ups into what was supposed to be an income fund?

  • Why did retail investors put so much of their money into one product?

  • What were the press and regulators doing?

but other funds will fail for different specific reasons as the reality is people and businesses make mistakes.

These mistakes are amplified when fees are taken regardless of results and as the fund gets larger the harder it is to find safe companies to invest it.

The small investor's one big advantage is that he can invest in shares that are fully liquid but trade in lower volumes, maybe only a million pounds a day or so.

Like company directorships things will never change while fund managers are protected from poor decisions.

It is almost certain that Woodford Investment Management have done nothing illegal so the losses incurred by the investors are the investors problem.

If the law was changed to something like fund managers salaries are held in trust for say 5 years and are fund assets if the fund closes then manager's thinking would change dramatically.

Events

25 Oct 2019
Schroders fees to be 1% a year on the first £600 million of assets and 0.8% on assets above this as well as a fee of 15% of any excess returns above a NAV per share of 77p.

24 Oct 2019
Good news for those who still believe in the WPCT, Schroders is to manage the trust "in line with existing investment objective and policy

The level of fees has not yet been disclosed and these may be problematical given the early stage and lack of income from many of the investments.

20 Oct 2019
The whole company is to be closed, the Patient Capital Trust is to remain under WIMs control for the next three months and its future after that is unclear.

In theory the trust is trading at a 50% discount to NAV, but what are holdings in companies like Industrial Heat really worth, especially if they are to be sold?

The trust appears to be so speculative who would want to take it over, especially as at the moment it doesn't charge a management fee?

16 Oct 2019
Well the WEIF is to be wound up, not by a decision of Woodford or the fund's members but by the Link Group.

This is of course in the best interests of the investor, clearly those still in WEIF are not to be trusted to make such a decision for themselves.

Yes, upon reopening there would have been some more withdrawals from WEIF but many who are still in the fund will be there because they still believe in it.

Don't worry if you still believe in the fund, two financial service companies have been appointed to sell the shares fairly quickly, quite possibly at a low point in the market for the more liquid shares and surely at pretty much any price for the more illiquid ones. This is in your best interests.

It really does look like the industry, winding up the fund requires FCA approval, has ganged up against a fund in trouble and has taken decisions that should have been left to the members of the fund.

Of course once the fund is wound up there will be very little press coverage of the fund and some of its more imaginative transactions.

I am not suggesting that Woodford is an innocent party in the failure, but I clearly see a we can blame it ALL on Woodford approach from those who might want to consider if they were asleep at the wheel.

8 Oct 2019
Much of the financial press seems to be enjoying Woodford's troubles but this doesn't help you if you have money in one of his funds or trusts.

As mentioned on the home page nearly everyone tells you that shares should be bought for at least the medium term, go onto the internet now and look at the advice on what to do with shares in Woodford Patient Capital Trust.

The majority view is that you should sell and accept a loss, today's price is around 40p meaning that most people would be taking a 50%-60% loss. So why is this advice being given?

It is easy to see why staying in the Equity Income Fund could be dangerous, there seems to be so little confidence left in it by so many people that more withdrawals are to be expected when it reopens.

It appears that the WPCT has been badly affected by the troubles in the WEIF, not just the loss of confidence in Woodford but they hold many shares in common. Yet is the WPCT in trouble? Yes it has borrowed, £150m in repayments may be due as soon an Jan 2020 and there are issues with NAV to these loans.

So I wonder if the delight in Woodford's downfall is in fact blinding people to the fact that WPCT may still be a good buy, the most negative assessment of NAV that I have seen is 34p and most are around the 60p mark

23 Aug 2019
As the bad news associated with companies where Woodford have shares seems to keep coming in I was wondering if I am being overly supportive.

Then there was this headline in the Daily Telegraph and similar ones elsewhere Fresh blow for Neil Woodford as Eddie Stobart’s listing is suspended.

The trucking part of the Eddie Stobart business (ESL not STOB) have split from the CEO, delayed the publication of their Half Year Update because of accounting issues and suspended their shares.

Yet the headlines are making this a Woodford issue as he has around 23% of ESL shares, come on now who would have criticized the investment prior to this? Yes we are talking about the green trucks with Eddie Stobart in great big white letters on the side.

22 July 2019
This is in danger of becoming a self-fulfilling doom prophecy, as more and more people panic the fund is being forced to sell its more liquid holdings such as Kier Group and the AA probably at a loss.

The media continues to run stories about retail investors saying that they didn't understand what they were buying and their lack of knowledge is not their fault.

It is their fault, if you trust a third party to manage your funds it is your responsibility to understand what you are buying and if you or others yank your funds at the first signs of losses then what do you expect?

"In support of Woodford" - I seem to be in a small group that is worried that Woodford will now become a sacrificial lamb, everybody will gang up on him to save themselves and somehow make this out to be a special case.

I am sure the regulators, his competitors and the media will be able to find something that they can say; "ah, this was the problem and we have changed the rules" then all can go back to normal.

Financial Service Providers have always "impressed" me with the way that they can tell people we will charge you money to invest your money, if we lose it, so be it, if we make a profit we will charge a performance bonus.

7 Jun 2019
I do not invest in funds as they magnify the problem of an investor's lack a detailed understanding of what they are investing in.
  • As an investor you are exposed to a lack of understanding as to what the fund manager is actually doing, rather than what you thought the fund's glossy brochure said.

  • The fund manager is exposed to a lack of understanding on what the companies he has invested in are doing.

  • As an investor you are exposed to a lack of understanding as to what the fund's supervisors would do if they had concerns about the funds operation.

Beyond this I don't believe that the issues with the Equity Income Fund are anything new and the real issues were caused by the people who had invested in the fund and then withdrew their money.

There is a lot of blame being laid at insufficient liquidity within the fund, but I feel that that this has been overstated as at some point all funds will hit liquidity issues.

Some private investors may have been spooked because the fund was losing money and they didn't expect it, but it was the big withdrawals that caused the issues.

This is what I find odd, If you are going to invest in a fund then the whole purpose is to trust someone to learn about companies that you don't understand and not panic if their choices in the more mainstream companies have rough periods.

Once the panic set in some holdings that are quite risky seemed to be used to question the judgement of the fund managers as a whole.

Industrial Heat is such an investment as it appears to be in a company involved in LENR (low energy nuclear reactions) an area often thought off as inhabited by crackpots and fraudsters.

Despite all the news I am yet to see any informed analysis that says that the fund has failed, it is going through a rough patch certainly but many funds do.


Background

7 Jun 2019
Born in 1960 Neil Woodford joined Invesco in 1988 and when he left he was running two large funds, the Invesco Perpetual Income Fund with £10.36 billion of assets and the Invesco Perpetual High Income fund with £13.64 billion in assets.

Leaving Invesco in 2014 Neil Woodford along with Craig Newman started Woodford Investment Management. As a superstar at Invesco Neil attracted funds to Woodford Investment Management based on his historic performance from professionals and via brokers.

By June 2019 Woodford Investment Management had four funds
  • Income Focus Fund - To provide a high level of income together with capital growth.

  • Equity Income Fund - To provide a reasonable level of income together with capital growth. This is an open ended fund meaning that money can be added or withdrawn.

  • Patient Capital Trust - The Company's investment objective is to achieve long-term capital growth. This is a closed fund meaning that shares in the fund can be bought and sold but the money in the fund is unchanged, it is also a quoted security.

  • Equity Income Feeder Fund - To invest at least 85% of its net assets in the LF Woodford Equity Income Fund (the Master Fund).

Woodford surprised the industry in August 2016 by announcing that they were dropping bonus payments and increasing salaries as bonuses didn't actually work, but beyond that they are fairly typical fund managers in term of fees.

The last time that I looked at the Patient Capital Trust the fees included; Performance fee - 15% of any excess NAV returns over a 10% cumulative hurdle rate per annum, subject to a high watermark.

The actual reasons for the loss in confidence in the Equity Income Fund are largely irrelevant but by Jun 2019 Equity Income Fund was reported to have dropped from managing £10.2billion to just £4.8billion

At around this time there was a £250million withdrawal request from Kent Council which coincided with the suspension.

Once confidence in a fund is lost then people start to look at the details and they saw what some may have found scary.

There is a rule governing UK funds that requires that unlisted securities must total less than 10% of the funds investments and this requirement seems to have caused issues when large withdrawal requests started coming in.

  1. Unlisted stocks within the fund became listed on the Guernsey Stock Exchange.

  2. Both the Woodford Equity Income Fund and the Woodford Patient Capital Trust had invested in unquoted started ups, these are of course fairly illiquid and investing in start-ups is not unusual.

    What was surprising to many was the overlap, companies appearing in both funds and at roughly the same percentage and then something happened that I would have thought would have raised regulatory alarm bells.

    The Equity Income Fund sold its stakes in some unlisted companies to the Patient Capital Trust, the Equity Income Fund received newly issued Patient Capital Trust shares as payment.

    As the Patient Capital Trust is a listed security the Equity Income Fund had just effectively converted unlisted securities to listed securities.

    Had the Patient Capital Trust been owned by a complete stranger then this would be a good idea.

    Given that both funds are managed by Woodford it looks strange.

    There was a quote that basically said that the Patient Capital Trust had wanted to buy more shares for a while but none were available until the Equity Income Fund wanted to sell.

This information may have accelerated the number and amount of requests to withdraw money. As the holdings within the fund are doing badly, that is why the confidence has been lost, the best investments to sell are the ones doing well as they can be sold without realising a loss.

This then means the fund does even worse as the good investments aren't protecting the bad ones so more people want to withdraw funds.

Of course the industry blames everyone else, it's the FCAs fault, broker's fault for over hyping the fund, advisers for not being cynical enough etc. Even MPs are getting involved, unfortunately they seem to be showing little understanding.

As the group trades on Neil Woodford's reputation all four funds/trusts may be affected by activities in other funds within the group.